Higher oil prices following a reescalation of conflict in the Gulf renewed inflationary concerns this week, seeing bond yields rise sharply. Though given the scale of the rise in yields, the moves across equity and FX markets, for now at least, have been far from disorderly. Brent crude oil rose to highs since May pressing an intraweek high of nearly $110/bbl before ending the week below $105. The ECB hiked rates by 25bps this week and the Fed and BoJ are expected to do likewise in the week ahead.
Key US inflation data only further raised expectations for a Fed rate hike at next week's meeting. Headline CPI for August rose 0.4%m/m and 3.4%yr, while the core rate printed a touch above consensus at 0.3%m/m, though the annual pace was 2.4% from a prior 2.5% in July. Despite his insistence not to offer policy guidance, Chair Warsh's Jackson Hole speech did effectively that as market expectations shifted towards a September hike, with the data since then reinforcing that outlook. Market pricing implies a tightening cycle of 3-4 hikes.
The ECB delivered a widely expected 25bps rate hike this week but still managed to out hawk the market warning that inflation was 'set to remain well above target for an extended period'. This was the second hike since June, and the depo rate now stands at 2.5%. Markets are expecting the ECB will continue to move towards a much more restrictive stance, pricing in a further 75bps of tightening by mid next year. Whether or not that is ultimately required remains to be seen. ECB President Lagarde gave no clear signs of that at the post-meeting press conference, while new macroeconomic projections published by the central bank made only modest changes to its baseline outlook from June. Slightly stronger growth and higher inflation is now expected, though the changes were not a material reassessment of the outlook.
Commentary from senior RBA members this week reinforced expectations for further tightening. The odds of a September rate hike sit at around 80%. Deputy Governor Hauser indicated unease over the inflation outlook had increased, while the bank's chief economist Hunter said that declining housing prices had yet to have a dampening impact on the economy. RBA officials in the week ahead will provide more insights on the economy and policy at their quarterly parliamentary testimony on Friday.
